Capital flight and sovereign bond spreads in Africa: implications for public debt sustainability

In the wake of the COVID-19 pandemic and the Russia–Ukraine war, many African countries are facing mounting debt distress, which increases the risk of needing a bailout from the International Monetary Fund (IMF). A severe capital flight may further impede the capacity to raise fiscal revenues, eroding the tax base, undermining government funding for public goods and services, and exacerbating wealth and power inequalities. To analyze the link between capital flight and sovereign bond spreads, we examine the factors influencing sovereign bond spreads from 1990 to 2018 across 21 African countries. We confirm a positive relationship between capital flight and sovereign bond spreads and follow the IMF debt sustainability framework to demonstrate that capital flight exhibits a varying effect on the debt sustainability of African countries, with the Seychelles, Sierra Leone, and the Congo Republic experiencing significant impacts, as opposed to Ghana and South Africa, where the interest rate channel exerts only a limited influence.